Overhaul plans likely to stall

The dollar index fell back towards previous lows yesterday as optimism over the passing of a fiscal reform bill in the near future faded. President Trump is constantly in petty feuds with Members of Congress which hamper his ability to pass legislation and are in danger of turning his Presidency into a cult of personality where very little to help the American people actually happens.

Despite further hikes in interest rates and macroeconomic data that finally supports tighter monetary policy the dollar is still suffering from political unrest although it is Trump’s stated intention to keep the dollar weak to provide an advantage to U.S. exporters. Last week’s upturn in hourly earnings is possibly the missing piece of the inflation jigsaw that the FOMC have been awaiting to move from tentative hikes to a hiking bias under which two or three hikes could take place in 2018.

The dollar index reached 93.15 yesterday but is now under pressure as the fiscal plans were expected to be a prelude to the main event which is Trumps economic reform package. It now looks unlikely that this will see the light of day until Q2 ‘18 although with this President you can never be sure.

May almost survives an entire day

Theresa May, the British Prime Minister, doesn’t appear to be a particularly clumsy or accident-prone person but she has recently had difficulty avoiding pitfalls some of which have been carefully placed in her path.

Yesterday, despite continued Brexit inaction, Mrs May seemed to have quelled, for now at least, the rebellion which had been steadily growing amongst her Party. Then, appearing on radio last evening, she hesitated fatally when asked if there were to be a referendum on leaving or remaining in the EU held today, how would she vote? Prevarication is a politician’s stock in trade but an inability to wholeheartedly support her Party’s main policy is unacceptable and is sure to be leapt upon at today’s Prime Minister’s questions in Parliament.

The fifth round of Brexit negotiations continue with still no sign of either side giving any ground. The rhetoric is becoming more entrenched and a hard Brexit probably without any agreement is now becoming more possible by the day. That will, in the end, suit neither side.

Emmanuel Macron, The French President, has been strident in his view, supported by Chancellor Merkel, that no transition period will be discussed until talk on a future relationship begins and that can only happen when the monetary issue has been settled.  Monsieur Macron may live to regret his hard-line approach when he sees the size of the additional funding he will need to find to fill the hole in the budget created by a hard Brexit.

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U.K. rate hike in the balance

There are still more than three weeks to go until the Monetary Policy Committee of the Bank of England will meet to agree on monetary policy. On that day the Bank will also release its quarterly inflation report. Obviously, members of the MPC will have had advance copies of the report and, in theory, that is the main plank of what they will base their vote upon.

The reality is, as ever, vastly different. First why should these knowledgeable and experienced people agree with the findings of the report? How much has Brexit been factored in? Where will income growth come from? These are the questions that will exercise their thoughts.

An official report released on Monday showed that wages had been growing at a faster pace than had been previously been reported and this will encourage arch MPC dove Gertjan Vlieghe who has stated publicly that he will only support a rate hike if wage inflation starts to grow. He could still see this evidence as insufficient but his colleagues are likely to be guided by BoE Governor Carney.

Carney has already commented that rates will need to be hiked “in the coming months” but whether heading into what will most likely be an extremely challenging winter could a dramatic fall in the pound caused by a no change vote be the best way to prepare?

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